For a new product sales are expected to be 2,000 in year 1, increasing by 1,000 each subsequent year to 5,000 in year 4. Two different manufacturing equipment options are available:
a) Up front equipment purchase cost of $12,000, with a manufacturing cost per unit of $0.80, and equipment salvage recovery (at end of four years) of $2,000.
b) Up front equipment purchase cost of $28,000, with a manufacturing cost per unit of $0.25, and equipment salvage recovery (at end of four years) of $5,000.
Assuming an interest rate of 9% over the 4 year production period, perform as economic analysis and select the best option.